Ending Corporate Tax Avoidance and Tax Competition: A Plan to Collect the Tax Deficit of Multinationals

Summary

As a response to rising international tax competition, which drags down corporate income tax rates globally, the authors propose that governments start collecting their “tax deficit”. Tax deficit is defined as the difference between what a corporation pays in taxes globally and what this corporation would have to pay if all its profits were subject to a minimum tax rate in each of the countries where it operates. Thereby, multinational companies having low effective tax rates in some foreign countries would pay an extra tax in their home country. This paper aims to estimate the potential revenues from such a tax with a focus on the U.S.

Starting from President Biden’s electoral proposition to impose a minimum effective tax rate of 21% on the foreign earnings of US multinational companies, the authors estimate that the collection of the tax deficit would yield a potential revenue of 48.0 billion USD for 2017. Under the assumption of a 4% growth rate for foreign income, they project potential cumulative revenue gains of 536.9 billion USD for the years 2021-2030.

The authors further discuss the need for international coordination to reach a global agreement to jointly adopt a country-by-country minimum tax, collect the tax deficit and design defensive measures against non-cooperative jurisdictions.

Key results

• With a minimum effective tax rate of 21% on foreign earnings, the potential tax revenue gain for the U.S. government would amount to 48.0 billion USD in 2017.
• The authors predict an additional cumulative revenue gain of 536.9 billion USD over 10 years.
• A variety of defensive measures adopted by a few leading countries can improve the situation even in the absence of cooperation by tax havens.

Policy recommendations

• The article suggests an internationally coordinated implementation of the tax deficit collection, in the form of a global agreement to adopt a country-by-country minimum tax on corporate income. This agreement could typically be initiated as part of the OECD / G20’s base erosion and profit shifting (BEPS) process.
• The minimum effective tax rate should be calculated on a country-by-country basis rather than globally to avoid averaging high-taxed and low-taxed income and reduce profit-shifting incentives.
• As a defensive measure against MNEs headquartered in uncooperative jurisdictions, the U.S. could levy a share of their tax deficit, corresponding, for instance, to the fraction of their global sales made in the US.

Data

Country-by-country reporting data of MNEs headquartered in the U.S. are provided by the U.S. Internal Revenue Service (IRS) in an aggregated and anonymized form.
[read more about CbCR data]

Go to the original article

The original article was published in the Law & Economics Research Paper Series of UCLA School of Law. It can be downloaded from Gabriel Zucman’s website. [pdf]